G.R. No. 108738 - Cruz vs. Court of Appeals

License Agreement and Registration
S.C. Johnson & Son, Inc. (Philippine domestic corporation) entered into a license agreement with SC Johnson and Son, U.S.A., granting rights to use trademarks, patents and technology, and to manufacture, package and distribute covered products, plus management, marketing and production assistance.
The License Agreement was registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064.

Royalty Payments and Withholding Tax
From July 1992 to May 1993, respondent paid royalties based on a percentage of net sales and withheld 25 % tax, remitting a total of P1,603,443.00.
On October 29, 1993, respondent filed a claim for refund of P963,266.00 with the BIR’s International Tax Affairs Division, arguing entitlement to the 10 % rate under the “most favored nation” clause of the RP-US Tax Treaty (Art. 13 § 2(b)(iii)) in relation to the RP-West Germany Tax Treaty (Art. 12 § 2(b)).

Procedural History
The Commissioner of Internal Revenue did not act on the refund claim; respondent filed a petition with the Court of Tax Appeals (CTA Case No. 5136), which on May 7, 1996 granted the refund.
The Commissioner appealed to the Court of Appeals (CA-GR SP No. 40802), which on November 7, 1996 affirmed the CTA decision.
The Commissioner then filed a petition for review on certiorari under Rule 45 in the Supreme Court (G.R. No. 127105).

Main Issue
Whether S.C. Johnson & Son, U.S.A. may invoke the “most favored nation” clause of the RP-US Tax Treaty (Art. 13 § 2(b)(iii)), by reference to the RP-West Germany Tax Treaty (Art. 12 § 2(b)), to reduce the Philippine withholding tax on royalties from 25 % to 10 %, despite the absence of a matching credit provision.